Commercial Lease Terms and Renewal Options in Ontario: A Practical Guide

How long should your commercial lease be — and what control do you have over staying longer? For Ontario tenants, the answers are almost entirely determined by the lease itself. Unlike residential tenancies, commercial leases have no statutory minimum or maximum term and no automatic right of renewal. A commercial lease term and renewal option that is poorly drafted can leave a thriving business scrambling for new premises with little notice — or locked into a space it has outgrown.

This guide explains how initial terms, renewal options, holdover clauses, and rights of first refusal work in practice.

What the "Term" Means

The term is the fixed period during which the lease is in effect. Most Ontario commercial leases run for 3, 5, or 10 years, though shorter pop-up or pilot leases exist. The term has two key dates:

• Commencement date: When rent starts running. This is sometimes later than the date you take possession (especially if there is a fixturing or rent-free period).
• Expiry date: When the lease ends, unless renewed or extended.

Why Longer Is Not Always Better

A longer term gives you occupancy certainty and often more leverage to negotiate tenant improvements upfront. But it also locks you into the space, the rent, and the landlord — which can hurt if your business shrinks, the neighbourhood changes, or you find a better location.

A shorter initial term combined with well-drafted renewal options can give you flexibility without sacrificing security.

Renewal Options: The Basics

An option to renew gives the tenant the contractual right to extend the lease for an additional period — but only if certain conditions are met. A renewal option is not automatic: you must exercise it correctly or it lapses.

Standard Renewal Option Structure

1. Additional term: Usually one or more periods equal to the original term (e.g., two five-year renewals).
2. Notice window: The tenant must provide written notice of exercise within a specified window — often 6 to 12 months before the expiry of the then-current term. Missing this window is the most common and most costly mistake tenants make.
3. Rent on renewal: Usually set at the prevailing market rent at the time of renewal, sometimes with a floor (never below the expiring rent). Disputes about "market" are common.
4. Conditions: The option is typically void if the tenant is in default at the time of exercise or at the start of the renewal term.

Tips for Negotiating Renewal Options

• Calendar the notice window immediately after signing. Set multiple reminders — 18 months, 12 months, and 9 months before lease expiry.
• Ask for the renewal rent to be determined by a fixed formula (e.g., CPI adjustment) rather than pure market negotiation, or include a binding arbitration mechanism if the parties cannot agree.
• Push for at least two renewal options (e.g., two × five years on a five-year initial term) so you have a 15-year runway if the business thrives.
• Confirm that the renewal option covers the same premises — especially in a shared building where the landlord may want to reconfigure space.

The Holdover Problem

If the lease expires and the tenant stays without signing a renewal, the tenant is in holdover. Ontario's Commercial Tenancies Act generally converts a holdover commercial tenancy into a month-to-month tenancy at the terms of the expired lease (including rent). However:

• The landlord can often charge increased holdover rent (sometimes 150% of the last base rent) as a penalty and deterrent.
• Either party can terminate the holdover tenancy with relatively short notice.
• The tenant loses the protection of a fixed term — the landlord could require you to vacate on short notice.

Always exercise renewal options (or negotiate a new lease) before the expiry date.

Rights of First Refusal and Rights of First Offer

These are separate but related rights often found in commercial leases:

Right of First Refusal (ROFR): If the landlord receives a bona fide third-party offer for space you want (e.g., adjacent space), you have the right to match that offer and lease the space on the same terms. The landlord must notify you and give you a set period (often 5–10 business days) to exercise.

Right of First Offer (ROFO): Before the landlord markets space to third parties, it must first offer it to you at a price of its choosing. You have a limited time to accept. If you decline, the landlord can lease to others (sometimes with restrictions on the price at which they can do so).

Both rights are valuable for growing businesses that may need more space. Both are also easy for landlords to work around if not precisely drafted.

Demolition and Relocation Clauses: Watch for These

Some leases give the landlord the right to:

• Relocate the tenant to comparable space in the same building with reasonable notice.
• Terminate early if the landlord intends to demolish or substantially redevelop the building.

These clauses can undermine the certainty you thought you had. If you depend on the specific location (a corner unit, a street-level retail frontage), negotiate to remove or restrict these provisions.

Frequently asked questions